The government has assumed a nominal income of 14.4% for 2021-22. Given the lockdown, it will be around 13.4% — 1 percentage point less. The gross tax revenue that has been assumed is unlikely to be met. Non-tax revenues will also be low despite the dividend from the RBI. So, the fiscal deficit of the Centre will be 7-8% of the GDP.
This level of fiscal deficit will require large borrowing by the government with the support of the RBI. So, in a way, monetary expansion I think is already happening in an indirect manner. The RBI is also pumping in huge amounts of liquidity through various operations. Expenditure is being supported by the borrowing with the help of the central bank. The RBI will have to watch out for the impact of liquidity on prices.
The expenditure of the government will need to be expanded to increase healthcare infrastructure. It will also need to be for vaccination. The Centre has provided Rs 35,000 crore in the Budget for vaccination and that figure will need to be doubled and, third, if lockdowns extend beyond June, funds may be needed to support vulnerable groups and the poor. Besides, there will be expenditures to stimulate specific sectors. All of this could be something in the range of Rs 2 lakh crore, or 1% of the GDP. This could call for some amount of adjustment of other expenditures. Vulnerable groups can be supported by way of some cash transfer through appropriate mechanisms.
The writer was governor of the RBI (As told to Surojit Gupta)
